As investment falls, EU innovation policy needs a ‘massive overhaul’, says start-up association

Start-ups need more help in accessing EU funding and support in expanding across the bloc if Europe is to compete with other global superpowers, the EU’s largest start-up association said as it launched its manifesto for the 2024 European elections.

Over the past five years Europe has focused on establishing the regulatory framework for the twin green and digital transition, rather than on promoting innovation, said Agata Hidalgo, European affairs manager at France Digitale, which represents over 2,000 startups and investors.

“It’s now time to reverse this balance, and go from being a regulatory superpower to an innovation superpower,” she said at the launch of the manifesto in Brussels on Wednesday.

The backdrop for France Digitale’s manifesto was the news that European tech companies are on track to raise $45 billion in 2023, down from $82 billion last year and less than half the $100 billion plus raised in 2021, according to Atomico’s annual State of European Tech report published on Tuesday.

In its manifesto France Digitale calls for a “massive overhaul” of European innovation funding policy - including in Horizon Europe - which taken overall is not doing enough to help European companies become world leaders.

By the time beneficiaries have applied for and received grants, the technology in question “may no longer be relevant or innovative, yet beneficiaries are forced by the contractual terms with the Commission to continue with the original project,” the manifesto says.

Compounding this, there is a lack of support for scaling up and commercialisation once funding comes to an end. France Digitale proposes simplifying and speeding up application and evaluation procedures, and providing consistent funding for products in development along the value chain, rather than injecting cash into multiple short-term projects.

“The launch of the European Innovation Council is an important first step, but feedback from start-ups and investors remains mixed,” the manifesto says.

France Digitale also calls on the future Commission to nominate a “vice president for an innovative single market”, to focus on competitiveness and developing innovation value chains.

This should coincide with a European start-up definition that distinguishes between start-ups and SMEs. Such a measure features in a report by S&D MEP Tsvetelina Penkova, adopted in committee on Wednesday, which the MEP hopes the new Commission will pick up after the elections.

To compete in the face of American and Chinese protectionism, Europe also needs a fully-fledged sovereignty fund, France Digitale says. The Commission’s watered-down proposal for a €10 billion Strategic Technologies for European Platform, which will promote European manufacturing in critical sectors, is “not up to the task”, and companies require investment and customers, not just subsidies, it says.

Unlocking funding

London-based Atomico points to a withdrawal of US investors as one of the main reasons for the drop in European tech start-up capital in 2023.

France Digitale’s analysis agrees access to funding is one of the main barriers European start-ups are facing, particularly in areas such as deep tech and biotech where significant capital is required from day one.

To address this funding gap, the association wants to see more progress in developing a capital markets union to make cross-border investing easier, and an increased budget for the InvestEU programme which uses guarantees from the EU budget to mobilise public and private investments.

The manifesto calls on the EU to play a greater role in de-risking investment in innovation, particularly by creating incentives for institutional investors like pension funds to invest in European venture capital firms.

Europe has “all the raw materials to be as competitive as the US in terms of innovation,” but is held back by a lack of institutional investors, said Audrey Soussan, general partner at the Paris-based Ventech investment fund. “Public pension funds contribute 65% of the capital in US VCs. It’s only 18% in Europe. This lack of pension funds is not compensated in terms of other investors,” she said.

France Digitale also wants to see sustainability factored into innovation policy and is calling for public procurement rules to refer specifically to the objectives of the Green Deal, and to help start-ups compete with established firms. “We can leverage the green transition to have European preferences for our start-ups,” said France Digitale CEO Maya Noël.

France’s 2024 budget, adopted in October, moves in this direction by giving start-ups with ‘young innovative company’ status access to public procurement without competitive tendering and with a simplified procedure. The measure was based on a report by French MP Paul Midy, which also called on the government to make it easier for pension funds to invest in innovative SMEs.

Startups also need better support to expand across the EU. France Digitale wants to see simplification of the eligibility requirements for European Company status. This was designed to allow businesses to trade across the EU using one set of rules, but currently applies to only 9,100 companies that are mostly “multinationals based in Germany”, according to the association.

It is calling for better recognition of certifications across the EU so companies only have to prove compliance once. At the same time, the EU should avoid drafting legislation that can be interpreted in different ways by member states, placing an additional burden on young companies.

Delayed fundraising

Despite the fall in funding, Atomico says there are plenty of reasons to be optimistic. For a start, 2021 and 2022 are seen as outliers, and investment in European tech in 2023 is up by 18% over the 2020 level.

In addition, more founders setting up tech start-ups in Europe than in the US, and they have done so for each of the past five years.

The report also found that more talent is moving from the US to work in the European tech sector than the other way around.

However, all these new tech companies continue to face a funding gap: after five years, US tech startups are 40% more likely to have secured venture capital funding.